Key information

CourtPrivy Council (UK)

IssuesConsideration
Past consideration
Performance of existing duties

Pao On v Lau Yiu Long

[1979] 3 WLR 435

Facts

Pao On agreed to sell shares to Fu Chip (controlled by Long) in consideration for certain shares. To protect the share value, Pao On and Fu Chip agreed that Pao On would retain 60% of the acquired shares until April 1974. However, in April 1973, Pao On refused to proceed with the contract unless Long agreed to indemnify him against the value of the retained shares falling below a set level. Long agreed, but only to ensure public confidence in the company. The sale proceeded an Pao On sought to enforce the indemnity.

Held(Privy Council)

There was consideration here – an act done prior to a promise can be good consideration in some cases; in particular, it will be good consideration if the act done was done at the promisor’s request, the parties understood that the act would be remunerated in some way and, if the promise had been given in advance of the act it would be legally enforceable. In this case all three elements were present. In particular, the defendant had requested that Pao On retain 60% of shares and the parties understood at that time that that act would be compensated by the provision of a guarantee.

Principle

An act done prior to a promise will be good consideration if:

the act was done at the promisor’s request

the parties understood that that act would be remunerated; and

had the promise occurred in advance of the act it would have been enforceable

The Court also observed that a promise perform ‘a pre-existing contractual obligation to a third party can be valid consideration’ in the absence of duress.